The Chancellor has slashed the exemption amount for capital gains tax and cut the dividend allowance in half today in a move that will strike a “heavy blow” to the UK’s entrepreneurs and investors.
In the Autumn statement, Jeremy Hunt said the government would cut the dividend allowance from £2000 to £1000, with a further 50 per cent cut due to come from April 2024, meaning that investors will now pay tax on dividends at a rate depending on their wider income.
Entrepreneurs who pay themselves via dividends are also set to be hammered by the measures announced by Hunt today.
A cut in the Capital Gains Tax threshold from £12,000 to £6,000 meanwhile is set to hit those with their cash outside ISAs and pensions tax wrappers, who will now pay a higher tax rate on their returns.
Analysts say say the dividend tax cut would choke off investment and dampen returns at a time when ministers should be encouraging investors to back UK firms.
“A dividend tax that kicks in at just £500 of earnings by 2024 could disincentivise investing at a time when it is really needed to help the economy grow, and for millions of investors who are looking to do more with their money to stay ahead of the pernicious effects of inflation,” said Sam North, analyst at trading firm eToro.
He added that slashing the allowance could lead to “unexpected outcomes” like people putting more money away from “typical FTSE income paying stocks to other growth focused – and typically riskier – investments elsewhere.”
Analysts at Bowmore Asset Management said that the changes to capital gains tax and dividends were a “double whammy” against investors.
“Whilst high net worth individuals are unlikely to feel much pain from this, for many small investors that increase in tax on dividends and capital gains is going to be significant,” said Charles Incledon, client director.
“Cuts to this income could cause a real squeeze on the finances of many small investors, especially those who are retired and depend on dividend income from their shares. Bad news considering that we have a cost of living crisis at the moment.”